HSBC cranks up the pressure on Huishan Dairy

Banks seemingly loses patience with a company whose troubles have underlined investor concerns about financial disclosure in China.

Huishan Dairy, the embattled Chinese company, faces a deepening debt crisis after HSBC, on behalf of five other banks, demanded the repayment of loans totaling $220 million, highlighting the perils of investing in China's more esoteric sectors.

Once a high-profile example of the country's broadening equity appeal – the company raised $1.3 billion from an initial public offering in 2013 – Huishan Dairy is fast becoming a poster child for what can go wrong for adventurous investors in China who fail to do their due diligence.

Trading in the group’s Hong Kong shares has been suspended since March, after the stock price sank by 85% and $4 billion was wiped off the company's value in an hour. 

It later emerged that Huishan Dairy was late with some of its loan repayments and that its treasurer had gone missing, prompting chairman Yang Kai to pledge nearly his entire stake in the company to secure the loans.

Just five months earlier, Huishan Dairy was also reported to have pledged 40,000 of its cows as collateral for a Rmb750 million ($115,000) loan programme.

“The Huishan Dairy saga raises questions about the level of public disclosure that is accessible to investors,” Henry Chan, chief investment officer at BEA Union Investment, told FinanceAsia. “Meanwhile, the incident highlights the government’s agenda to clean up dodgy companies.”

Huishan Dairy first came under pressure in December last year when US short-seller Muddy Water accused the company of overstating its profits by producing fraudulent financial figures. Huishan Dairy rebutted the allegations at the time and the share priced remained steady – that is, until March. 

“Investors are getting more cautious about the use of corporate leverage in China and [the] credit fundamentals of debt issuers after the Huishan incident," Chan said.

In a filing to the Hong Kong stock exchange late on Monday, Huishan Dairy said HSBC, one of the four sponsors on Huishan Dairy’s IPO, requested the immediate repayment of a $200 million syndicated loan, including any accrued interest. In addition, HSBC terminated a credit facility provided by the bank in 2014 and requested immediate repayment of a $13.7 million credit line. 

According to its latest annual report, Huishan Dairy's net debt ratio rose to 55.0% in March 2016 from 32.2% in 2015, while its net finance costs over the same period, including interest payments on bank loans, surged by 111.1% year on year to Rmb322.9 million.

Thursday D-Day

Huishan Dairy said the latest deadline to repay the $200 million loan facility, which was arranged in October 2015, falls within 3 days of September 11, which is Thursday.

That follows a court order filed by HSBC in early April in Shanghai to freeze some of the assets of Huishan Dairy and its chairman, the last time the borrower failed to repay the $200 million loan on time.

HSBC acted on behalf of six creditor banks including China CITIC Bank International, Hang Seng Bank, Bank of Shanghai Hong Kong branch, China Merchants Bank Hong Kong branch and Chong Hing Bank.

Huishan Dairy, which is taking legal advice on the matter, is also said to be in discussions with banks in China about a possible restructuring of its debt.

A Hong Kong-based spokesman at HSBC declined to comment.

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